Angela Paterson: Is a CVA a lifeline to trade out of COVID-19?
As the coronavirus lockdown continues giving many businesses restricted or no option to trade, Angela Paterson, associate director of Dunedin Advisory, specialist restructuring and insolvency advisors, highlights a potential lifeline to consider – a CVA.
A CVA is a procedure governed by Insolvency Legislation where a company puts a proposal to its creditors agreeing to make payment back to them over an extended period of time, often with reduced settlement terms.
It allows a company to negotiate with creditors regarding how much and over what timescale funds will be paid often providing that much-needed breathing space and additional time to trade out of difficulty.
If successful it allows the company to survive and retain jobs whilst managing payments to creditors which would otherwise not be possible. The company management remain in control of the company operations and day-to-day running.
What type of proposals are made to creditors?
Each case is distinct and there are often different proposals for varying supplier groups. For example:
- the proposal may include the early termination of a lease agreement resulting in penalty charges which are then included paying a % of the cost rather than the full balance.
- it may provide for repayments at lower amounts in the early stages increasing as the company trades out of its difficulties.
- some creditors may be offered 100p in the £ and others a lesser amount over a period such as 3-5 years.
- secured creditors may be asked to vary their terms and agree different timescales or a replacement agreement in place agreed pre CVA.
- ordinary creditors may be offered a settlement of less than the amount owed (for example, 50p in the £ with no interest payable).
- there may be debt for equity built into the solution.
The company continues to trade during the CVA process and may ask creditors to provide future supplies which would be paid under normal trading terms with the accrued debt being repaid in terms of the CVA proposal. The idea is to enable the company to continue with the CVA in place and once completed return to normal trade securing its future.
Usually, the alternative would be a cessation of trade or liquidation in which there would be a far worse outcome for creditors, in many instances having to write off the majority or all of the debt.
Do all creditors have to agree to the CVA?
No, they don’t have to agree but need to be provided with details of what the alternative options would be and the prospects of recovery to enable them to make an informed decision.
For a CVA to work, at least 75% of the value of the creditors need to agree to the terms and if they do, all creditors are bound whether they agreed or not. If less than 75% of the value of the creditors agree, unless some objecting creditors can be persuaded, then the CVA could not proceed.
How long does a CVA last and what if it fails?
Every proposal is different however it should clearly set out the timescales for creditor consideration, ideally over a period of around 2-3 years. In some instances, this can be longer, potentially up to 5 years. It may be the impact of COVID-19 will result in repayment timescales being extended. Usually regular payments are proposed albeit it could be a few months before these commence.
The proposal will state what would happen should the CVA fail for whatever reason, typically this is when the company is placed into liquidation. A liquidator will be appointed and unless a buyer is found reasonably quickly, he/she will sell the company’s assets to realise as much as possible and distribute this amongst the creditors. The break-up value of the company is likely to be far less than the income the company could generate if it continued to trade.
Should customers continue to trade with a company in CVA?
Depending on the type of business the CVA may or may not have a direct impact on customer sales. Where goods are supplied with warranties additional assurances may require to be given. Where financial viability forms part of the contract the CVA would require to be suitably robust and of relatively low risk of failure for ongoing customer contracts. Again, each business will be considered on its merits. The aim is for the business to trade out of difficulty and to continue in business for years to come.
So long as the business continues to operate there may be no apparent difference to the customer journey. COVID-19 is such an exceptional worldwide pandemic that customers should be fully aware the unprecedented shutdown has had an impact on all businesses. Long-standing businesses with strong customer relations, offering a valued service and product are more likely to continue to be valued and supported by their customers.
Who puts a CVA in place?
A CVA is a form of corporate insolvency and therefore requires you to work with a licensed insolvency practitioner “IP” firm such as Dunedin Advisory. Our qualified IPs would work with you to put together a workable proposal and only if we are satisfied that the proposal is viable would we be willing to support it.
The IP must sanction the proposal and agree to be the ongoing supervisor of the CVA whilst it is in operation. The company directors will remain in office unless change is part of the proposal and will be responsible for all future company decisions and operations. They are however required to report regularly to the IP and demonstrate that the company is continuing to meet the terms of the CVA proposal agreed with creditors.
How much will a CVA cost?
There is no set fee for a CVA. The IP firm will agree the basis of the fee chargeable with the company at the outset based on the level of work required to assess the company financial position and the extent of the proposal required.
Typically, IP fees are built into the CVA proposal and payable on a monthly basis over the term of the CVA.
CVAs are a means of rescuing a viable business that may have experienced cashflow difficulties due to the loss of a major contract, the non-payment of a debt due to the company, high cost premises rents and rates that are no longer manageable, high lease commitments and now in the COVID-19 climate suffered from extensive loss of trade during the lockdown period.
It is a positive procedure that allows the survival of a business, the safeguarding of jobs and most likely the best possible return to creditors.